So it is little wonder that congressional leaders are looking to chop Medicare and Medicaid spending, which have long been favorite targets of budget-cutters. As part of its effort to replace the ACA, Congress last year tried to eliminate full dollar-for-dollar sharing of Medicaid costs between the federal and state governments and replace it with finite block grants to the states.

The plan would have limited the federal government's expenditures, leaving states with the lose-lose proposition of either paying more for Medicaid programs or slashing services and eligibility. Meanwhile, on a smaller level, Washington has delivered "death by a thousand cuts" to hospitals, engaging in a misguided effort to achieve savings by chopping hospital reimbursements time and time again. Most recently, the Trump administration and Congress have reduced Medicaid-funded disproportionate share hospital (DSH) payments, which assist hospitals that provide substantial charity care to residents of low-income neighborhoods.

Such budget-cutting strategies end up hurting the most vulnerable members of society — the millions of poor, elderly and disabled Americans who rely upon the government to provide their health care. The fact is, there have been too many efforts to cut costs rather than address the real source of the problem: America's health-care delivery system, which is inefficient.

"Government-funded Medicare and Medicaid account for more than $1 of every $3 of U.S. health-care spending and $1 of every $4 in the federal budget."

Medicine currently follows the capitalistic model of other American industries: A fee is paid whenever a service or good is delivered. This incentive-based approach works well in most every industry, but not in health care. Fee-for-service encourages more tests and treatments, some of which are completely unnecessary. More health care does not mean better health care.

When providers are incentivized to maintain health rather than respond to illness, they treat patients earlier in low-cost environments, like neighborhood clinics, before health problems become serious and require expensive care in a hospital setting. Those who can deliver more value by keeping patients healthy should be able to share in the savings of the health-care expenditures they have reduced.

Providers who spend more than would normally be expected for a given patient should receive no incentive payments. Furthermore, in this shift to value, there is appropriate fiscal support and incentive for the care that needs to happen in between physician visits (for example, disease education, health coaching and other ongoing care-management work). In this kind of system, the interests of payers, providers and patients become aligned.

Keeping patients healthy and out of the hospital

It can be done. Kaiser Permanente, which serves patients in eight states and the District of Columbia, combines hospitals and outpatient clinics with its own nonprofit insurance plan. Kaiser has a fixed annual amount to care for each member, so there is an inherent incentive to keep patients healthy and out of the hospital, where care is most expensive. Because its structure aligns the interests of payers, providers and patients, Kaiser operates efficiently and they are not alone. In fact, many other health systems, including the Mount Sinai Health System, are creating the same incentive model in partnership with private health plans.

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Technology is facilitating this kind of value in health care. Laparoscopic surgery, using miniature digital video cameras and electronic tools, allows for small incisions that result in quicker recovery times and shorter hospital stays than traditional open surgery. Telemedicine services enable patients to talk to their doctors by remote video, saving time for both physician and patient and allowing for check-ins between office visits. Biosensors dramatically speed diagnoses by making it possible for doctors to monitor patients who are at home, reading their blood pressure, glucose level and electrocardiogram in real time and initiating treatment before a condition becomes serious.

Taken one step further, the Hospital at Home concept, which Mount Sinai Health System began in 2014, allows patients to be monitored closely from their own bedrooms and receive daily visits from a doctor or nurse practitioner, as well as home nursing care, lab services and medical equipment in their home, which is far less costly than remaining in the hospital.

Such money-saving programs are well established in England, Canada, Israel and Australia. In the Australian state of Victoria, every hospital offers hospital-at-home service, which accounts for 6 percent of all "hospital bed days." This value-oriented hospital-at-home concept has great potential for expansion in the United States, particularly given the growth of telehealth and remote monitoring capabilities.

By integrating the mobile and digital technology that is part of our everyday lives, medicine will be able to lower the number of hospital admissions and substantially reduce costly readmissions. As hospital stays become shorter and surgical outpatient procedures advance, there will be less need for hospital beds and more reason to expand ambulatory services. Consequently, hospitals will continue to build the community medical practices and outpatient surgery centers that are needed for more value-oriented care.

To be sure, full-service hospitals will still be necessary — we all need to recognize there will come a time when most of us, particularly as we age, will need complex hospital care. Hospitals will simply be focused on management of chronic and complex illnesses, intensive care and high-level urgent conditions, such as thrombosis in the brain or a myocardial infarction (heart attack) requiring emergency treatment, with careful monitoring in an intensive-care unit. Smaller community hospitals will have to shift; more of them will become hospitals without beds, providing more ambulatory services and less-intensive inpatient care.

These changes in American health care aimed at improving value are under way. Now the shift toward value must accelerate because our fee-for-service approach is failing. We need a payment system that stops rewarding health-care providers as if they are factories and, instead, one that will be beneficial for providers, payers and patients. Rather than indiscriminate cost cutting, value-based care is the smart way to bend the health-care cost curve. It will improve patient health, as well as the nation's fiscal and economic health.

Commentary by Dr. Kenneth L. Davis, president and CEO of Mount Sinai Health Systems and an advisory board member for Healthy Returns, CNBC's new health-care innovation conference that will take place on March 28, 2018, in New York City.

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